How to trade the Fibonacci indicator in 2024Today, we’ll start with what Fibonacci is and how to use it to spot significant market turning points.
Let’s start with...
A short story about Fibonacci
In 13th century Italy, lived a man named Leonardo Pisano – one of the greatest mathematicians of all time.
Leonardo (also known as Fibonacci), learnt all about Arabic and Indian mathematics during his travels in North Africa and around the Mediterranean regions.
Each time he travelled to a new place, he kept noticing a consistent pattern that repeated itself throughout nature.
The sequence he defined was as follows.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
Basically, all you do is take the last two numbers and add them up to get the next number.
0 + 1 = 1
1 + 1 = 2
1 + 2 = 3
2 + 3 = 5
3 + 5 = 8
8 + 5 = 13
And so on…
Fibonacci first contrived this pattern through a pair of breeding rabbits but he then saw this pattern throughout nature - in the breeding of honeybees , the shape of seashells as well as plants.
This sequence also applies to trading and investing charts and is called the Fibonacci Retracement indicator.
The Fibonacci Retracement indicator is used to help identify possible support and resistance levels for any market.
The idea is all high liquid markets tend to move, to and retrace back, to certain levels after a big price move.
The indicator is used to calculate the ratios and percentages using the Fibonacci sequence.
Let’s look at an example with the South African JSE ALSI 40.
Fibonacci on the JSE ALSI 40
Looking at the above daily chart of the JSE ALSI 40, you can see the index has fallen from a Swing High point of (100%) at 70,522 down to a Swing Low point (0%) to 65,386.
On your platform, when you add the Fibonacci Retracement tool onto your chart, you'll drag it from the swing high to the swing low price of the uptrend to see six main horizontal fib lines present themselves:
Fib line #1: 100% (Swing high)
Fib line #2: 61.8%
Fib line #3: 50%
Fib line #4: 38.2%
Fib line #5: 23.6%
Fib line #6: 0% (Swing low)
Traders use these lines to establish and identify supports (floor) and resistances (ceiling) levels.
And with these levels you’ll be able to spot good entry, stop loss and take profit price levels.
Once you draw the Swing High and Swing Low on the JSE ALSI 40, the Fibonacci lines will be plotted on the chart.
You would also have seen the market then went to one of the high points at 61.80% at 68,560.
The price then retraced back to the 23.6% level at 66,598.
So you can see where we are going with this.
As a reversal trader, you could have sold (gone short) the index around 68,560 and held it until it hit the 66,598 line at 23/6%.
That’s where you would have banked a gain just by waiting for the market to bounce off a fib line.
That’s a good introduction and a different way for you to trade and use the Fibonacci Retracement tool with your trading in 2024.
Let me know if this was helpful!
